Wednesday, April 08, 2009

A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. - Warren Buffet

One would think the several economic bubbles (and their inevitable violent bursts) experienced by the world and U.S. economy would provide some caution for investors looking for the next “big thing”. Unfortunately, this does not always seem to be the case, and even at the beginning of this recession, some investors poured a great deal of money into agricultural real estate. Last year, when commodity prices soared, farmland was seen by many people (most completely outside of the agricultural industry) as a solid investment. Farmland was purchased by investors and rented to farmers to work the land (50% of U.S. farmland is rented in this way). One of the key components of figuring out the value of the rents is the price of the commodities the land will produce. Investors bought the land and charged rents for farmers based on 2008 commodity prices, not anticipating the global financial meltdown. Of course, due to the recession, commodities prices are down. This creates an obvious problem for a lot of farmers, especially small farms.

So far, the recession hasn’t forced land prices down too far, based on the recent data from the USDA. The stronger dollar and lack of demand abroad has pushed prices for U.S. exports down, and hence, overall farm revenue. In other words, the land values are out of sync with the value of what the land produces—an obvious problem, with a number of parallels (think tech stocks and price to earnings ratios circa 1998, average home prices versus average household incomes circa 2005, etc.)

Of course, this is a problem—this kind of outside influence on the price of land hurts small farmers, especially those transitioning to sustainable and/or organic practices. At the end of the day, this kind of speculation raises food prices for everyone to the benefit of a few investors, encourages non-sustainable, short-term farming, will eventually lead to a collapse that will affect small farms disproportionately, not to mention consumers. The impact of agriculture is enormous, and touches each of us—we must, as citizens, demand that our governments do a better job at ensuring our agricultural viability.

What do we do about this? The government could financially fertilize programs like the First Time Farm Purchase Loan program (funded by the 2008 Farm Bill with a paltry $350 million), and other kinds of direct loans to farmers to purchase land. There should also be increased power for the FDA, working with the SEC, to regulate purchases of land by entities that will not be working the land. This agricultural “middle man” (the investors) only serves to raise food prices for the rest of us—taxing the hell out of renting farm land to farmers might be a way to encourage non-involved investors to stay out of the farmland business. Protecting vital and special resources like agricultural land should be a no-brainer—we’ve seen the damage bubbles can do to other, less important sectors of the economy, and we can ill afford this to happen to our food supply.